Focus on Canada

Canada is a premier member of a small league of nations, along with Australia and Argentina, whose grain exports greatly exceed national consumption.

Annual cereals and oilseed production has been about 30 million tonnes in recent years, or more than one tonne for each Canadian. Consequently, at least two-thirds of this output is shipped to over 70 countries. On average, wheat from the Prairie provinces of Alberta, Saskatchewan and Manitoba provides 20% of all wheat in world trade, 65% of durum wheat, 15% of feed barley and 30% of malting barley.

Any discussion of the Canadian grain business must start with the Canadian Wheat Board (CWB), a nearly 70-year-old institution that is the single desk buyer and seller of all wheat and barley (excepting domestic feed-use barley) in western Canada.

Headquartered in Winnipeg, and with about 500 employees domestically and offices in Tokyo and Beijing, the CWB generates over U.S.$4 billion in export revenues in most years. The CWB has traditionally justified its monopoly status by its ability to provide a fair return to 85,000 Canadian grain growers through price pooling and elimination of payment risks, efficient contracting for transportation and storage and effective international marketing.

Critics of the CWB are many and legal challenges have been raised repeatedly by other countries as well as certain farmer groups, particularly those near the U.S. border who feel they should have the op- tion to sell directly when prices are better than those offered by CWB.

The E.U. and the U.S. complain that the CWB, as a state trading enterprise, gives Canadian grain an unfair advantage. Three guarantees provided by the government of Canada through the CWB have been judged by competitors as antifree trade. First, there is an initial payment guarantee, so if world prices fall, the farmer still gets a minimum price for his grain. Secondly, CWB borrowings are government guaranteed, and thus its interest rates are equal to those enjoyed by the largest international grain companies. Finally, the Canadian government assumes all payment risks associated with CWB exports.

The CWB counters by pointing out that all of its pricing is based on international market signals, and that the biggest distortion in the international grain trade results from the export subsidies provided by the E.U. and the direct payments made to farmers in the U.S., which accounted for over 40% of farmers incomes in both places, versus subsidies in Canada, which are less than 20%.

GRAIN STORAGE AND DISTRIBUTION

For the amount of grain it handles, the CWB is a lean organization. Though it does take title to almost all of western Canada’s grain, it owns few storage and transportation assets. Instead it contracts with railways, trucking companies and several large grain trading companies that own elevators and terminals across the country.

The largest of these include James Richardson International (JRI), Cargill, Parrish and Heinbecker, Patterson Grain, Saskatchewan Wheat Pool and Agricore United. The latter two are 100% publicly traded companies and the rest are privately held.

To better mimic a free grain market, the CWB has learned to be flexible in payment and delivery arrangements. Farmers are very often paid on delivery by the grain traders, who act only as CWB agents in this regard.

FLOUR MILLING

One industry group that generally sees itself as benefiting from the CWB system is Canadian millers, who use over 3 million tonnes annually. With just one phone call, they can obtain their wheat at the same price as paid by all competitors. CWB pricing is set off the Minneapolis Grain Exchange and is transparent to the entire industry based on a daily fixing at 1:30 p.m.

Despite the elimination of any possible cost advantage in wheat purchasing, the industry has endured a fair degree of consolidation. There are 43 industrial mills with a total of 11,000 tonnes per day of installed capacity for whole and white wheat flour and another 1,300 tonnes of durum capacity.

Just five companies own 17 of these mills and produce 80% of the country’s flour. Number one is ADM, which has a 40% market share with seven mills scattered across four provinces. The next company in line is J.M. Smucker with its Robin Hood brand. It has three mills plus a mixing plant and an 18% share.

The industry has undergone significant investment in modernization in the last 10 years but almost entirely in existing facilities. Only one greenfield plant, Rogers Foods in British Columbia, which is owned by Japan-based Nisshin Flour Milling, has been built in recent memory. Capacity utilization is roughly the same as in the U.S.

Mutual accusations over export subsidies aside, one big effect of the North American Free Trade Agreement (NAFTA) has been to create a truly North American market for flour-based products. There has been a gradual increase in nearly every product category in twoway trade between the U.S. and Canada since NAFTA’s inception.

Canada is both exporting to and buying from the U.S. much more wheat flour and products such as pasta, mixes and breakfast cereals than it did 10 years ago. One industry rule of thumb is that for such products the U.S. now supplies 10% of Canadian demand while Canada supplies 1% of U.S. demand.

One particular success has been oats, where yearly exports to the U.S. generally exceed 1 million tonnes for feed, but in the last several years, a number of new oat mills have been built in the Prairies to supply the surging U.S. consumer demand for whole grain products.

FEED MILLING, OILSEEDS AND BIOFUELS

Feed milling is one grain-related industry where CWB involvement is minimal. Commercial production of complete feeds is about 15 million tonnes out of a total requirement of 27 million tonnes for all poultry and livestock in the country. The rest is mixed non-commercially on the farm. According to the Animal Nutrition Association of Canada, there are about 450 commercial feed plants in the country.

Some of the grain trading agents of the CWB mentioned above count among the largest feed producers, including Cargill and Agricore United (30% owned by ADM). Feedrite, based in Winnipeg, is another major player.

The benefits of the North American trade relationship are emphasized by the even balance in feed: 650,000 tonnes of exports to the U.S. and 740,000 tonnes of imports from the U.S. to Canada in 2004-05. However, Canada depends on its southern neighbor for about 3 million tonnes of maize per year.

In Canada, rapeseed is known as canola, and it is considered the country’s third most valuable crop after wheat and durum.

Canada produced 7.7 million tonnes of canola in the 2004-05 crop year. Of that total, about 3.4 million tonnes was exported whole, and the equivalent of an additional 2 million tonnes was exported as meal and oil.

Soybean production has climbed steadily in recent years to more than 3 million tonnes. More than 1 million tonnes is now exported.

Biodiesel production in Canada is just starting to take off, so fewer oilseeds may be exported in the future. Canada’s handful of existing ethanol plants are mostly in Ontario and rely partly on maize imported from the U.S. New laws, regulations, and subsidies have been put in place to stimulate greater production. Current plants will be expanded and several new plants are on the drawing boards. Some may use wheat, barley and possibly straw and wood.

How development of an ethanol industry will affect the position of the CWB is unclear. What is clear is that the CWB may lose parts of its monopoly in the not too distant future.

The new Conservative Party government of Prime Minister Stephen Harper, elected in January 2006, made dismantling of CWB authority part of its platform in order to win support from disgruntled western farmers, who at a minimum want a dual marketing system. The CWB may have to cede some powers, but judging from history, it will not be without a fight. WG

David

McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by e-mail at davidmckee59@msn.com.